The Global Implications of China’s Economic Slowdown

China’s economy is slowing. China reported
that its economy grew at a rate of 6.6% in 2018,
whether this number is genuine or inflated, it is still its slowest reported growth since 1990. However, while
that is a far cry from its highest growth rate of 15.4% in 1993, it is still one of
the highest rates in the world. No country can maintain a breakneck pace like
China’s forever, and its economy is slowing down and beginning to mature as
people expected. Even if we leave out the current trade war with the USA, there
lies an argument pertaining to whether this slowdown, compounded with the two
key issues facing China’s economy: its real estate market and its debt load,
has the capacity to create enduring damage to its
economy that spills in to the global markets.

China’s real estate market, which has been one of the major pillars
of its economy, is looking poised for a recession this year. Real estate in China has
long been used by the government as a job creating mechanism, employing
citizens, increasing demands for resources and generating cash. While this
created a positive economic stimulus, it has created a negative aftereffect, as
buildings lay empty in many smaller cities across the country. China has tried
to continuously build new homes as a way to stimulate investments and create
the effect of home values appreciating, but housing demands have cooled, and
production has surpassed the demand, even causing some developers to slash
prices in an effort to sell properties.

At the moment, in major cities like Shanghai or Guangzhou the
price-to-income ratio, or the number of years someone would have to work to
afford a home without spending, is currently around 26:1 (average 9:1) more than double
the U.S. where it tops out at 10:1 (average 3:1). However, if
housing prices across the country start to fall as predicted, it could have a
drastic effect on the economy, as indebted property builders will not be able to pay their debts for
these properties and will be forced to pay steep interest rates. The IMF even published
in a recent report that “a crisis in
China’s housing market would be of considerable global concern.” China can’t
afford for a major part of its economy to falter at a time when it is fighting
a trade war and it is falling under an ever-increasing debt stockpile.

But the straw that will most likely break China’s economic back is
its massive burden of public and private debt. While the USA reaching $22 trillion in debt has gotten
people worried, China has blown by that number, piling up a staggering $34 trillion in debt. While taking
on debt is necessary to grow and transform an economy, especially at such a
pace of China’s over the past 20 years, it is now estimated that its debt has
reached over 310% of its GDP. China’s problem is to find a
method to reduce its economy’s reliance on debt-fueled growth without slowing
down the economy even more than it already is.

While the government does hold tight controls
over its capital flows and banks, its ability to try to manipulate its
financial system to attempt to contain its debt burden and limit its risk of a
financial crisis may not be enough in this case. Whereas the government has
been implementing stimulus package after stimulus package to try and minimize
their companies’ reliance on debt and stimulate the economy, it’s not possible
to continue these attempts without further affecting the markets negatively.
China’s debt load faces more risks than other countries due to the fact that
the government is in the position of it being both a lender and borrower,
through its many state-owned companies, which concentrates its risks rather
then diffusing them.

One of the major issues of relying on debt-fueled growth is that capital is often misallocated, meaning the government ends up creating worthless assets like empty cities, factories that don’t manufacture anything or state-owned enterprises that do nothing. These useless assets have a higher chance of defaulting on loans causing a serious drain on China’s economy. However, dealing with this issue will weigh on China’s growth, because if the government writes off loans it will end up dragging down the country’s GDP. Doing this would end up lowering growth for a few years, which is why this issue has continued to remain unaddressed, even if it has a high importance.

China’s economy has been a driver for global growth and the beginning
of its economic slowdown is starting to spread concern around the world. China
is showing many of the same signs the USA was before its own financial crisis
in 2007-2009, with a housing market bubble and a substantial amount of debt
that is unlikely to be repaid. If China’s economy begins to stumble due to
either its real estate market faltering or its impending debt pile, or both,
reverberations will be felt around the globe. How this slowdown will affect the
global economy is an important question, and the answer lies in whether the
economy slows down to just a growth recession or snowballs into a financial
crisis.

A growth recession would certainly be felt in the Asia-Pacific, but
most major economies would be able to continue on relatively unscathed. While
many countries are reliant on China’s cheap exports, their slowdown shouldn’t
be too much of a concern to economies outside of Asia, as production should
continue somewhat close to normal. As China is the second largest importer in
the world, some countries will suffer a setback do to lack of demand, but it
will most likely be very minimal. This growth recession will mostly affect
China’s labour force because the economy is struggling to create enough new
jobs for the high number of people joining the labour market every year. This
is especially problematic as China has to continually create a massive amounts
of new jobs, as 15 million workers, including 8
million university graduates, enter the workforce every year.

A financial crisis, on the other hand would be felt across the global
economy. Many major economies like Canada, France, Italy and the United Kingdom
have been facing periods of stagnating or falling growth rates over the last
five years and this could be a tipping point. If you add in Britain crashing
out of the EU and the possibility of a crisis in Italy, it will compound the
affect China’s slowdown will have on the global economy. Nothing on the scale
of the 2008 financial crisis is expected, as the USA’s economy was more
intertwined with major developed economies than China, but it could still have
lasting effects on the Asia-Pacific and beyond.

The hope that China will face just a minor
growth recession and doesn’t end up in a financial crisis is one shared both
inside and outside the nation. While China has been trying its best to stem the
bleeding and push growth while keeping the slowdown out of their minds, it has
not been successful. Chinese businesses and government need to focus on
preparing for their impending slowdown in a way that damage is minimized both
inside and outside the country’s borders. No matter what Chinese officials
believe, their economy’s decades long streak of explosive growth cannot be
sustainable in the long term. They have to start being comfortable with sub 6%
growth levels, something which is a big point in the leading party’s ideology.
China’s growth numbers will be slowed by a recession and pushed down even
further by a financial crisis, so it seems for China’s “growth rate obsessed”
officials it would be in their collective best interest to get moving on their
damage control. How much they work to stem the bleeding and the effects it has
on their economy, and on the world in turn, remains to be seen.

Featured Image: Chinese Yuan. Via Pixabay.com

Disclaimer: Any views or opinions expressed in articles are solely those of the authors and do not necessarily represent the views of the NATO Association of Canada.

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About Matthew McDonald

Matthew McDonald is currently the program editor for NATO Operations at the NATO Assocation of Canada. He is currently studying Global Management Studies (B. Commerce) at Ryerson University. He has previously interned at the U.S. Chamber of Commerce in Washington, DC and has completed several internships in finance. He is interested in the increasing role China plays on the global stage, and plans to pursue a master’s degree in international affairs or economics after graduation.
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NATO Association of Canada (NAOC) is an independent non-governmental organization established to foster a better understanding of goals of the North Atlantic Treaty Organization and Canada’s role in NATO. While independent from NATO, and not funded by NATO, it utilizes its strong relationships with governments and international organizations to facilitate awareness and understanding of foreign affairs and Canada’s participation in global security. The views expressed by the NATO Association of Canada may not reflect the views of NATO.